Qualifying a tenant buyer for sandwich lease option

5 Replies

So I want to explore lease options or owner financing. I have a seller who is intrested in the possibility. I went against my better judgement and signed up for a seminar and bought the course mostly for the contracts. It was mostly a disappointment for many reasons but what it doesn't touch on is, when collecting a deposit from a tenant buyer, what happens when they decide to exercise the option? Will they be required to put down the 2.5 or 3% deposit the lender requires them to qualify for the loan? Even though they put down a deposit with you. This seems unattractive for potential TB. Will the lender require an apprasial of the property and what if it appraises under the value they are under contract for? For example, I have them under option for 150K but the lender's appraisal comes back at 120K the lender is not likely to issue a loan above value. I am completely confused on this part.

  I am in Michigan.

@Roger Medina

1. Most lenders will accept the money the T/B paid to you for option consideration as their down payment when closing. I suggest you structure the L/O so that the T/B will have 5%-10% saved up toward exercising the option.

2. Yes the lender will require an appraisal, and no they won't issue a loan if the house is way overpriced. You should price it at the top of today's market value, not 25% above it.

Originally posted by @Doug Pretorius :

@Roger Medina

1. Most lenders will accept the money the T/B paid to you for option consideration as their down payment when closing. I suggest you structure the L/O so that the T/B will have 5%-10% saved up toward exercising the option.

2. Yes the lender will require an appraisal, and no they won't issue a loan if the house is way overpriced. You should price it at the top of today's market value, not 25% above it.

Would you recommend giving them some rent credits towards that 5-10% to exercise the option or only recommend they save up? Seems like a lot a tenant has to spit out but so many people sware by the success of this strategy. Also, thanks for your feedback!

@Roger Medina Yes and no. You can't use "rent credits" because the lease option will be reclassified as a sale and require a foreclosure instead of an eviction if things go bad.

You have to use separate lease and option agreements which do not refer to each other. So let's take your example property that's worth $120k, here's how you would set up the paperwork:

First the lease. You're going to lease the house to your tenant for 12 months for say $1,000/month (assuming that's a reasonable market rent). And then renew their lease for another 12 months at say $1,025/month. None of this goes toward the purchase, it's just a normal lease.

Next the option. You're going to sell them the option to purchase the property within the next 2 years for $125,000 for $5,000 upfront and $312.50/month for 24 months. All of this is paid on top of the base rent.

At the end of the 2 years they will have paid a total of $12,500 or 10% of the purchase price which they show the lender as their total down payment.